Pricing Agribusiness Risk

Our expertise and experience in pricing risk in agribusiness enterprises is central to our ability to advise on capital markets funding strategies.

Category: Current

African Forestry Sector Review

The African tropical forestry sector, largely operated under concessions by European, Asian and Middle Eastern logging and milling companies, is characterised by significant logistical challenges, a strong focus on sustainability and certification in the European and North American markets (but less so in Asia), strong international demand (driven significantly by Asian countries), and high growth consumption patterns across the African Mediterranean and North African countries. European concession operators are subject to very considerable scrutiny for compliance with global best practice, but many Asian concession owners appear to operate more opaquely. The challenge for African countries is to manage their forest reserves sustainably, to protect their national heritage of biodiversity and natural landscapes, while providing for their expanding populations. For the companies operating in this complex sector, demand growth looks to be a given, but price formation may have been restricted by the ‘illegal’ supply of forest products, and by the dominant influence of Asian purchasing. The increasing focus of European and North American consumers, and government agencies, on certified supplies, implies that with continued growth in demand, there may be strengthening in prices for certified production. Ulrich Grauert, CEO of the Swiss domiciled Interholco, which operates 100% FSC certified concessions in the Republic of Congo, has observed to us that “our experience is… prices have been strongly increasing since 2000… and the markets driving prices are… Asia, North Africa, Middle East and the USA. We… foresee steady price increases in almost all major species in the years to come.”

While Chinese demand for wood has been the leading influence on the global wood economy in the past 20 years, and continues so to be, African demand will increasingly be in contention with China and other Asian economies. It is not improbable that the population of Africa will become the world’s largest consumer market around the middle of this century. The Forest Stewardship Council has projected that African demand for industrial roundwood could reach between 100 million and 400 million m3 as soon as 2030, under variable scenarios for demographic and economic development. Some describe this vision of African demand as an impending ‘supply crisis’. Not surprisingly, at least one large concession operator, Likoula Timber (Republic of Congo), has stated that its primary focus is now on supplying demand from within Africa itself. Yet the patterns of production and consumption are very different across the African continent. It is also the case that many tropical African countries lack the facilities for secondary and tertiary processing of significant volumes of timber, and the logistics infrastructure across Central and Western Africa will need significant upgrading to support the development of an efficient and profitable internal timber market.

Please click to download: African Forestry Sector Review – March 2018

Jatropha Sector Review – Too good To Burn

The success of humanity in taking control of Earth has involved a series of partnerships with plants of outstanding utility. Our relationship with these crops is a constant strand in the history of our species and a defining expression of our presence on the planet. Consider that just four crops: wheat, corn, rice and soya cover more than 5% of the World’s land area. This compares with 2.7% for cities and 12% for the remaining rainforests. These are ‘conqueror crops’. Jatropha curcas, traditionally an undomesticated hedging plant with secondary utility as a source of oil, came to prominence when it was proposed as a feedstock for biofuel during an earlier era when crude oil was trading over $70 bbl. Research into the plant’s properties reveals that it has far greater utility than just as a source of energy. In this report we detail how Jatropha derived products have the scope to address an annual global sales opportunity of more than $120 billion in a variety of high value industrial applications. Addressing at least 8 classes of industrial applications, Jatropha derived components, have in a number of cases, superior technical functionality to competitor plant products, hinting at the crop’s potential to increase its importance for mankind. However, unless there is a credible prospect of scaled, economic, upstream supply of Jatropha commodities, these opportunities will be lost to proven commercial crops, such as soya and oil palm. A group of industrial investors and the crop science entities they are supporting (including names such as JOil in Singapore and Resolute Genetics in San Diego), are racing to put Jatropha into contention, to address the opportunities briefly detailed herein.

Please click to download: Jatropha Sector Review – Too Good To Burn – December 2017

The Tropical Tree Crop Sector of Sub-Saharan Africa

Sub-Saharan Africa has suitable conditions for the cultivation of the most important tropical ‘tree crops’ including Oil Palm, Natural Rubber, Coconuts, Cocoa and Bananas. Yet, with the exception of cocoa production, African production of these big tropical ‘tree crops’ is small relative to the output of the Asian producer nations: Indonesia & Malaysia in the case of palm oil, Thailand and Indonesia in respect of natural rubber, Indonesia and Philippines in respect of coconuts, and India, China and the Philippines in respect of banana production.

In all these segments, a distinguishing feature of African production is the bias towards production by the informal, smallholder sector. Within the smaller agro-industrial sector, the influence of European and Asian plantation companies is fundamental to the current structure of the industry, and it seems likely that the future shape of the sector will also be led by these companies. However, for investors, there are limited direct investment opportunities in businesses able to benefit from the growth in demand for African tropical ‘tree crops’. Those companies which have significant Africa based business operations, and which also have a stock market listing, are detailed herein.

Please click to download: Tropical Tree Crop Sector of Sub Saharan Africa

Indonesian Palm Oil Sector Consolidation: A Wave of Consolidation To Come

Indonesian palm oil production assets have become too cheap: KLK’s unsolicited offer for MP Evans looks likely to change all that.

Above $550/mt FOB, or $770 CIF Rotterdam, the production of palm oil is a profitable business for commercially scaled and efficient Indonesian producers. At higher prices, palm oil production businesses are quite literally ‘money pumps’. The KLK bid for MP Evans will have jolted the investment community to take note that many quality names, like MP Evans, are or have been trading below replacement value. At the offer price for MP Evans, KLK could expect to earn a return of up to 16.5% on every hectare purchased. In an era of negative bond rates, considering that the megatrend of human population may push beyond 9bn to 12bn by the end of this century, noting that although slowing, the Chinese economy is now by some measures the largest in the world and still young, palm oil assets look anomalously cheap.

Please click to download: Indonesian Palm Oil Sector Consolidation

Cocoa – The Midas Commodity

For investors the cocoa value chain has provided some outstanding investment opportunities and as the demand for chocolate confectionery continues to grow in new markets, and to mould to shifting consumer tastes in the developed markets, further opportunities for wealth creation can be expected.

Hardman Agribusiness (HAB) estimates that the global cocoa derived consumer goods sector has a brand value of some $300bn, equal to 0.41% of global GDP. A review of the spread of this wealth effect suggests that there is scope for further significant growth in brand value, especially in the big emerging market economies.

We detail in this report the outstanding examples of Hotel Chocolat and Royce. Additionally, a growing group of developers of modern upstream cocoa production assets is assuming that tightening supply / demand tension will allow their projects to develop profitable and valuable production businesses, hoping that the ‘Midas Commodity’ effect will flow upstream as well as downstream.

Click for our report: Cocoa – The Midas Commodity

A Progressive Culture – ICCO World Cocoa Convention – Dominican Republic

Hardman Agribusiness presented at the ICCO World Cocoa Convention in Baravo, Dominican Republic, on 24th May, 2016.

Today 95% of the cocoa produced comes to the market thanks to the efforts of some 5 million subsistence smallholder farmers practising a form of agriculture that has changed little in centuries. Over many years, and continuing today, the downstream end of the cocoa value chain has instituted numerous initiatives to modernise farming practices with the goals of improving farmers’ lives and making cocoa production sustainable. The evidence that these initiatives have been successful, certainly in respect of the latter objective is slim. Dr Jean-Marc Anga, Executive Director of the International Cocoa Organisation (ICCO) speaking that the 3rd World Cocoa Convention in Bavaro, Dominican Republic observed that “the producers are the weakest link in the cocoa value chain”. Dr Anga noted that in 1960/61 cocoa produced globally averaged 0.29mt per hectare against 0.52mt in 2015. Progress, but not enough over 55 years. Today in parts of the Americas, innovative farmers are achieving up to 3.0mt/ha. Hardman Agribusiness reviewed the outlook for cocoa production in the Americas at the 3rd World Cocoa Convention in the presentation below.

Please click for our presentation: A Progressive Culture – Dominican Republic

Cocoa’s Latin Future – 2nd Cocoa Revolution Conference – Vietnam

Hardman Agribusiness presented at the 2nd Cocoa Revolution Conference in Ho Chi Minh City, Vietnam, on 11th March, 2016.

We discussed the supply chain risk represented by the global cocoa related consumer goods sector’s reliance on the production output of Ivory Coast and Ghana, noting that cocoa production, dominated as it is by small holder farmers (95% of total production) is one of the least evolved systems of agriculture in the world. Unlike the other large soft commodity categories, cocoa does not feature a significant professional production sector. With stock to use ratios consistently falling over this century and the cocoa price rising under demand pressure, there are real fears that supply deficits will impact over the next few years. In contrast to West Africa (72% of world production), Latin America (18% of world production) has the nucleus of a professional cocoa farming industry and unlike most of Asia, Latin America has a vibrant cocoa culture.

Please click for our presentation: Cocoa’s Latin Future – 2nd Cocoa Revolution Conference – Vietnam

Destruction by Chocolate

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To read our report click photo above.

ICCO Cocoa Market Outlook Conference

Hardman Agribusiness presented at the ICCO Cocoa Market Outlook Conference in London, 22nd September, 2015. We focused on the supply chain risk represented by the global cocoa related consumer goods sector’s reliance on the production output of Ivory Coast and Ghana, noting that cocoa production, dominated as it is by small holder farmers (95% of total production) is one of the least evolved systems of agriculture in the world. Unlike the other large soft commodity categories, cocoa does not feature a significant professional production sector. With stock to use ratios consistently falling over this century and the cocoa price rising under demand pressure, there are real fears that supply deficits will impact over the next few years. In contrast to West Africa (72% of world production), Latin America (18% of world production) has the nucleus of a professional cocoa farming industry and unlike most of Asia, Latin America has a vibrant cocoa culture.

Please click for our presentation: Latam Leadership – ICCO Cocoa Market Outlook Conference

A Taste For Cocoa – Messages From The Markets

Over the first 15 years of this century the leading chocolate confectionery listings have outperformed the S&P 500 by 3.5x and since 2013 they have marginally outperformed the commodity price itself. Meanwhile the only cocoa plantation to list on an international stock exchange, United Cacao Ltd (CHOC) has seen its share price rise by 173% since listing in December 2014 for a value of some $20,000/ha when only one third of the plantation is actually planted. Capital markets investors and commodities traders and investors appear to be linked by a strong liking for cocoa related investment and trading opportunities. During 4th  and 5th March 2015, Hardman Agribusiness presented A Taste For Cocoa (Messages From The Markets) at the CMT Cocoa Revolution Conference in Singapore.

Click to download: A Taste For Cocoa – Messages From The Markets